Gross investment

economic-dictionary

Gross investment is a term used in macroeconomics, this includes the stock, replacement or variation of existing or generated capital goods within an economy during a certain period.

So in gross investment we find total capital investment. That is, it represents the total of capital goods such as machinery, buildings, land, etc., which are used to manufacture consumer goods or other capital goods.

Due to the fact that the capital goods used in production suffer wear and tear, this forces to periodically carry out certain expenses in replacement of the same. This replacement may be equivalent to the wear and tear or depreciation of capital assets. Also, the investment in replacement may be greater than such wear.

Gross investment is also called by many authors in the economic world as gross fixed capital formation. This is so because these capital goods remain stable for a long period, allocating them to the production of new goods.

The part of the variation of capital goods that goes beyond what the capital replacement represents, comes to be what is called in economics as investment. Since it is a portion that is destined to the production of new goods that represents an accumulation of capital or fixed assets.

An important concept related to gross investment

It can be said that within the term of gross investment there is another very important term implicit in economic science.

As the investment made in an economy is intended to sustain or increase the production of goods. The process to achieve this requires replacing or replacing the portion of wear that equipment, instruments, machinery, buildings, etc. experience in such a process. Likewise, for the most part, such replacement portion is greater than the wear and tear suffered by capital goods. It is worth clarifying that such wear and tear of capital assets is called depreciation in the accounting and economic sphere.

Relationship between gross investment and net investment

In this context, a new concept of great importance within the economy is proposed and extracted, this is that of net investment. Which is nothing more than the result of subtracting depreciation from the net investment. Therefore, it is appropriate to differentiate between gross investment and net investment.

Gross investment = net investment + depreciation

Net investment = gross investment - depreciation

As can be seen, the difference is that gross investment is the total investment made in the economy to carry out production in a given period. Meanwhile, the net investment is the part or portion that has been added or added to the existing capital of the period.

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